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A costly silence: Lessons from the court of appeal

If proof were needed of the growing recognition by the UK judiciary of mediation as a viable alternative to litigation, it came recently in the form of PGF II SA v OMFS Company 1 Limited [2013] EWCA Civ 1288. The Court of Appeal was firm in its view that any party that refuses to engage in a reasonable request to mediate is likely to face costs sanctions.

PGF involved a number of dilapidations claims brought by a landlord, PGF, against its tenant, OMFS. Both parties made various offers to settle during the course of the dispute, looking to settle the claim at various amounts (the landlord at £1.125 and then at £1.25m, and the tenant at £700,000). In addition, PGF invited its tenant to mediate on two occasions, both of which were met with silence.

The case ultimately settled just before the trial was due to start, with the landlord accepting an offer made by OMFS nine months earlier, after OMFS pointed out that the air conditioning system, which accounted for a large part of the claim, was in fact outside the terms of the demise. Although usually this would have led to OMFS being awarded its legal costs (from 21 days from when the offer was made) the judge at first refused to do so in this instance, agreeing with the arguments raised by PGF that the lack of response to its two requests to mediate earlier on in the proceedings was unreasonable.

On appeal, Lord Justice Briggs agreed with the decision at first instance, stating that: “The time has now come for this court firmly to endorse the advice given in Chapter 11.56 of the ADR Handbook, that silence in the face of an invitation to participate in ADR is, as a general rule, of itself unreasonable, regardless whether an outright refusal, or a refusal to engage in the type of ADR requested, or to do so at the time requested, might have been justified by the identification of reasonable grounds.”

The Court firmly rejected the tenant’s arguments that discrepancies in the parties’ offers to settle demonstrated that mediation was unlikely to succeed. It also rejected any arguments based on a lack of an ongoing relationship between the parties, holding that the dispute was in fact “eminently suited to mediation”.

From an objective perspective, the judge’s reasoning is very much in line with the Civil Procedure Rules, as well as Lord Justice Jackson’s report on civil litigation costs. The Dilapidations Protocol, which has now been part of the CPR for nearly two years, similarly encourages parties to a dispute to explore ADR.

The Court of Appeal has sent a strong message to any potential litigants that a failure to consider any “sensible mediation proposal” is likely to be met with a costs sanction.

The ADR Handbook (as well as earlier decisions such as Burchell v Bullard [2005]) confirm that a failure to offer to mediate amounts to a refusal to mediate, and that a mediation request must not be ignored. If the ADR request is considered inappropriate, full and clear reasons must be given for this. The ADR Handbook goes on to say that a party should not close off any type of ADR, as another type of more appropriate ADR may emerge at a later date.

While a court cannot force parties to mediate, it certainly has powers to encourage them to do so, via costs sanctions. Prior to PGF, the landmark decision on this point was the 2004 case of Halsey v Milton Keynes General NHS Trust, wherethe Court of Appeal reversed the usual rule that costs are paid by the unsuccessful party and awarded costs based on a refusal to engage in ADR.

Interestingly, in PGF the landlord had also argued that the tenant should be forced to pay the landlord’s costs, in addition to its own. The Court of Appeal disagreed, on the basis that “a sanction that draconian should be reserved for only the most serious and flagrant failures to engage with ADR”. It went on to say that such costs orders might be imposed where the Court’s encouragement to engage in mediation is ignored.

Current market conditions mean that both landlords and tenants are having to assess any potential dilapidations liability ever more closely. The landlord in the hope of having its premises back in repair, or at least having some compensation for any lack of repair, and the tenant, wanting to reduce its liabilities at the end of the lease.

While some commentators argue that PGF amounts to ‘commercial coercion’ to engage in mediation, the message is one that all property litigation professionals will need to take on board, and pass on to their clients: consider ADR or face the potential cost consequences.

Arguably, an experienced mediator could well have spotted the point raised by OMFS, which led to the eventual settlement of the dispute, much earlier.

This post was written by Maria Shahid, a legal/property journalist, and first appeared in Property News.